Time to Clean Up Mutual Funds
Wall Street still doesn't get it. It's showing an amazing lack of remorse following its $1.4 billion settlement with regulators for violating conflicts of interest during the boom years. One Wall Street CEO publicly dismissed the settlement as having no consequence to his firm. Another complained that the remedies would only hamstring operations. A third firm violated the spirit of the settlement by using an analyst in a "road show" to promote a stock he was covering. Wall Street is not regaining the trust of individual investors who lost billions when they were persuaded to buy stocks by analysts and brokers shilling for investment bankers. Their only recourse is to seek protection by investing through larger, professional players -- the mutual funds.
Pity that the fund industry has warts of its own. If ever there were an opportunity to play the hero to the small investor, this is it. If the mutual-fund industry can clean up its act, it could become the last best chance for bringing the disenchanted individual investor back into the equity culture. What should be done? In an era of single-digit returns, the excessive costs, high fees, and high compensation paid to mutual-fund managers seriously erode investor returns. But they have been hidden from investors for years.
What individual investors need are quarterly mutual-fund statements that show exactly how much they are paying out in fees on their accounts. Investors also need to know how much mutual-fund managers are actually compensated. Finally, investors need to be free of 12(b)-1 fees they pay for the funds' marketing and advertising costs. This bizarre tax was imposed in 1980 by Congress to help expand the mutual-fund industry. It was ridiculous then. It is outrageous today.